It’s a question that interests policymakers and employers alike: When workers leave or change jobs, what do they do with their employment-based retirement savings—and why?
New research from the nonpartisanResearch Institute (EBRI) finds that it largely depends on whether they retire or stay in the work force. The group’s research focused on financial behavior of job changers over age 50.
EBRI found that among those still in the labor force, most left their funds in their previous employer’s plan. Those who stopped working and retired after termination tended to take the money, either as a cash distribution or as a rollover into some other account.
However, a number of other factors also play a role in influencing the choice.
For example, individuals with higher account balances, higher incomes and greater wealth, as well as those who already owned an individual retirement account (IRA) most often chose to roll over their balances, usually into an IRA. In contrast, low balances and relatively less wealth correlated with cashing out retirement savings.
That’s usually a poor decision. Withdrawing 401(k) funds before age 59½, results in a 10% penalty, and the account holder must pay income tax on the distribution.